Orchestrating Europe (Text Only). Keith Middlemas

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      It was some relief when, prompted by the German chancellor, Willi Brandt, the Hague summit of December 1969 endorsed the aim of ‘Economic and Monetary Union’ (EMU) and set up the Werner Group. Although Brandt’s proposal seemed a major departure from the usual German line of insisting on the primacy of prior policy coordination, the Werner Group very soon found itself embroiled in old conflicts. Two schools of thought prevailed: the ‘monetarist’, which saw fixed exchange rates as a means of forcing policy coordination, and the ‘economist’ school, represented by Germany and the Netherlands, which saw the maintenance of fixed parities as impossible without convergent economic policies. The Werner Report, submitted in October 1970, adopted a compromise position. It called for the realization within ten years of complete and irreversible convertibility, closely aligned exchange rates, the full liberalization of capital movements and the creation of a common central banking system.

      To achieve these ends it recommended a narrowing of the margins of fluctuation (from 1.5% either side of par) and a better organization of policy cooperation, especially in the area of foreign monetary policy. It took until March 1971 before the measures were approved. Although the French endorsed the monetarist approach, they wanted to avoid at all costs any discussion on the political and institutional aspects of EMU. But it was exactly a commitment on these aspects that Germany and the Netherlands saw as the price for their concessions. As a result, the resolution approving the goal of EMU left the questions of the transfer of power and institutional reform undecided.

      Thus nothing was in place when the Bretton Woods system experienced its next, and ultimately terminal, crisis. In 1970 the USA, still experiencing mounting balance of payments deficits, had eased its monetary policy; consequently, speculative funds flowed back to Europe and, in particular, to Germany. The thinking of the German Bundesbank now moved quickly in the direction of a DM revaluation as a means of reducing the attraction for foreign funds, but there was still the question of how to reconcile this with maintaining parities within the EEC. In spring 1971, the German finance minister, K. Schiller, apparently against the feelings of the majority within the Bundesbank, proposed a joint flotation of all EEC currencies against the dollar. This was resisted by those countries that did not want their currencies dragged upwards in the slipstream of the DM. Instead something reminiscent of the 1966 Luxembourg ‘agreement to disagree’ was decided. The DM and the guilder floated, while other countries introduced capital controls. The decision by Nixon to suspend dollar convertibility in August 1971 only reinforced the divide. Italy now joined Germany and the Netherlands in advocating flexibility of exchange rates, while France, Belgium and Luxembourg preferred a system of exchange controls. Action was further delayed by a general agreement that the key to a global currency realignment lay in a dollar devaluation and not in a revaluation of other currencies. Thus another four months elapsed before the Smithsonian Agreement validated a change of most EEC rates against the dollar of between 7.5 and 16.9%.

      The Smithsonian Agreement also allowed currencies to float by 2.25% on either side of the new central rates, which implied that EEC currencies could diverge by as much as 9% before triggering intervention to stabilize the exchange rate. This prospect produced a compromise whereby European currencies would maintain a tighter rein on their rates with each other, whilst moving jointly against the dollar: the so-called ‘snake in the tunnel’. The system was also briefly joined by the aspirant members. However, there was still no mechanism to produce convergent policies, nor were convergent policies adopted. Soon the new rates appeared as unrealistic as the old ones they had replaced. In June 1972, sterling left the snake and floated downwards. Ireland and Denmark, heavily reliant on the UK market, immediately followed suit, although Denmark rejoined after four months.

      These mutations notwithstanding, the ‘success’ of the system prompted new moves, agreed in October 1972, to reinforce EMU but, significantly, no agreement was reached on the second step towards attaining the ultimate goal. Meanwhile divergent policies continued to exact their toll. Attempts to get the UK to rejoin the float in January 1973, when it joined the EEC, were rebuffed by a government that did not want to sacrifice recovery for exchange rate equilibrium. The following month, the Italian lira was forced out of the system. The fact that Sweden joined was little consolation. However, the final blow to the system (and to the chimera of economic and monetary union by 1980) was the fate of the French franc which in January 1974 was also left to float. As Tsoukalis comments, by this stage a group comprising Germany, Benelux and Scandinavia had to be understood as ‘little more than a DM Zone’.

      The 1966 Luxembourg Compromise had allowed the Council, and thus the EEC, to resume its work by postponing the introduction of majority decision-making and allowing the right of national veto. For many observers who had looked for further progress towards supranationality and contributed to a body of neo-functionalist literature to rationalize their aspirations, the Community appeared interesting but no longer exciting. Moreover, the issue of UK membership again strained relations among the member states. The second British application in May 1967 – followed by applications from Norway, Ireland, Denmark and Sweden – was again aborted by a negative French vote in December 1967. It was clear that on this particular question France was immune to the feelings of its European partners. The Five tried to maintain pressure on France by using the WEU for initiatives to extend cooperation to the political as well as monetary field. This ‘rebellion’ could only be prevented by de Gaulle’s intervention, using the so-called ‘Soames Affair’ (in which the British had leaked details of confidential conversations with the General that suggested a revival of a free trade area to include agriculture) which produced another ‘Empty Chair’. The mood deteriorated further: if the Community were ever to be enlarged to embrace the UK, something in France itself would have to change.

      In fact French attitudes shifted surprisingly fast. It is possible that there were objective factors behind the change. For example, new concern about German economic power emerged, especially as France’s balance of payments weakened. Germany’s refusal to revalue during the monetary crisis of 1968 reinforced the fear about the balance of power within the Community which may have produced a feeling that the UK could serve as a countervailing force. Secondly, the Warsaw Pact’s invasion of Czechoslovakia had led de Gaulle to repair relations with the USA. It has been argued that this made it senseless to persist in seeing the UK as an Anglo-Saxon ‘Trojan horse’ in the Community. Although both of these arguments are plausible, until evidence is provided to the contrary it seems most likely that the contemporary view, which attached the greatest importance to the shift in power from de Gaulle to Pompidou, was closest to the truth. Although the government was still ‘Gaullist’, under Pompidou it contained four ministers who were members of Monnet’s Action Committee for a United States of Europe. Whatever the ultimate reason, in July 1969 Maurice Schuman announced that France was willing to countenance some European rélance. Proposals linking the completion, strengthening and enlargement of the EEC would be forthcoming at the Hague summit in December.²⁶

      The Commission quickly wrote the Hague summit into its hagiology calling it a ‘turning point in its history’ (EEC Bulletin, 1/1970). It would be churlish to deny that much was accomplished, although different countries laid different emphasis on different parts of the package. France was most interested in completion of the Community and, specifically, the financing of the CAP. The others were primarily committed to enlargement. Nevertheless the decisions at the Hague, taken together, represented an ambitious programme for future development. It was agreed to find a definitive financial arrangement for the CAP by the end of 1969. By July 1970, ministers had requested a report to deal with possible developments in the field of political unification. By December 1970, they wanted a further report on Economic and Monetary Union (EMU). Last, but undoubtedly not least, it was agreed to open negotiations with candidate-countries.

      Implementation of the agenda began immediately after the conference. Between 19 and 22 December, agreement was reached on financing the CAP and on the EEC’s financial resources. The latter involved allocating to the Community all receipts from levies and customs duties, as well as national contributions to cover any deficits, and their gradual replacement СКАЧАТЬ